Systemic risks require non-traditional solutions – EIOPA

Europe’s insurance regulator has said that it may look to the capital markets for solutions to systemic future risks and to secure the capacity for business interruption covers.

The European Insurance and Occupational Pensions Authority (EIOPA) has published its staff paper on measures to improve the insurability of business interruption in light of pandemics.

The paper has been put out for industry consultation until 31 March 2021 but suggests that part of the solutions may well be via non-traditional risk instruments.

“To improve society’s capacity for bearing business interruption risk beyond traditional insurance mechanisms, capital markets can be an additional layer of risk transfer and diversification,” it said. “Designing new and successful capital markets instruments for financing business interruption risk in a pandemic crisis pose challenges, and require legal certainty, predictability and swiftness in the payment of claims. Progress on pandemic risk modelling and pricing is needed, where possible incentivizing risk prevention through relevant claim triggers.”

EIOPA said it had analysed options relating to prevention measures to reduce losses, capital markets risk transfer, and multi-peril solutions for systemic risk. The paper also seeks to address the general challenges related to modelling and triggers for claims in the context of pandemics.

In a statement it explained: “EIOPA emphasises that a key element of shared resilience solutions is prevention. By promoting prevention measures, insurers can improve society’s capacity to reduce losses. Improving clarity on the scope of coverage as well as integrating prevention measures in risk-based pricing of the insurance cover can contribute to showing the true cost and create incentives for preventive behaviour. Prevention can be supported by regulatory incentives, as well as by public-private initiatives for sharing data. Aligning public-private measures for risk prevention can help in reducing moral hazard and improve the insurability of the risk.”

Multi-peril solutions can provide opportunities for addressing the systemic risk of ‘following’ events it added.

“While pandemic-specific schemes are being discussed today, the option to introduce future-focused multi-peril pools should be considered going forward. This could support the development of common prevention measures, as well as address the opportunity cost of separate peril solutions.”